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6 EVERY MACROECONOMIC WORD YOU HAVE EVER HEARD: GROSS DOMESTIC PRODUCT, INFLATION, UNEMPLOYMENT, RECESSION, AND DEPRESSION ________________________________________________________________________ PROBLEMS 1. A country has the following labor statistics: _______________________________________________________________________________ Military Personnel ……………………………………………………………. 1.5 million Population under 16 years old who are working part time …………………… 0.3 million Population over 16 years old who are working part time …………………….. 4.2 million Population over 16 years old who are working full time ……………………... 14.3 million Those without jobs and who are actively seeking jobs ……………………….. 1.5 million _______________________________________________________________________________ Calculate the following: a. the workforce _________________________________________________________________________ ________________________________________________________________________________________ b. the unemployment rate ________________________________________________________________________________________ 2. The data for the average annual tuition are listed in the table on the next page. a. Use the tuition cost in 1990–91 of $3,016 as your base year cost. Estimate a price index for undergraduate tuition costs at American institutions of higher education. b. How have tuition costs changed between 1990–91 and 2005–2006? c. How have tuition costs changed since 1976–77? 74 Chapter 6 AVERAGE ANNUAL UNDERGRADUATE TUITION PAID BY FULL-TIME-EQUIVALENT STUDENTS IN U.S. DEGREE-GRANTING INSTITUTIONS Selected Years 1976–77 to 2005–2006 Tuition and Required Fees (in-State) at All Institutions Tuition and Fee Price Index 1990–91 = 100 1976–77 $924 ____________ 1978–79 1,073 ____________ 1980–81 1,289 ____________ 1982–83 1,626 ____________ 1984–85 1,985 ____________ 1986–87 2,312 ____________ 1988–89 2,658 ____________ 1990–91 3,016 ____________ 1992–93 3,517 ____________ 1994–95 4,044 ____________ 1996–97 4,564 ____________ 1997–98 4,755 ____________ 1998–99 5,013 1999–00 5,238 ____________ ____________ 2000–01 5,377 ____________ 2001–02 5,646 ____________ 2002–03 6,002 2003–04 2004-05 2005-06 6,608 7,122 7,601 ____________ ____________ ____________ ____________ Year Note: Data are average charges paid by students for the entire academic year. Tuition and fees were weighted by the number of full-time-equivalent undergraduates. The data have not been adjusted for changes in the purchasing power of the dollar over time. Source: Table 313, U.S. Department of Education, National Center for Education Statistics, http://nces.ed.gov/programs/digest/d06/tables/dt06_319.asp. Every Macroeconomic Word You Have Ever Heard 3. During the 1970s, there were two oil crises. As the price of energy increased, production and transportation costs increased throughout the United States. The higher costs were passed onto the consumers in higher consumer prices. The CPI data from the 1970s and early 1980s are listed in the table below. Calculate the inflation rates for this turbulent time in our economic history. CONSUMER PRICE INDEX All Urban Consumers Base Year: 1982–1984 =100 Year CPI At End of Year Inflation Rate 1971 41.1 1972 42.5 ____________ 1973 46.2 ____________ 1974 51.9 ____________ 1975 55.5 ____________ 1976 58.2 ____________ 1977 62.1 ____________ 1978 67.7 ____________ 1979 76.7 ____________ 1980 86.3 ____________ 1981 94.0 ____________ 1982 97.6 ____________ 1983 101.3 ____________ 3.3% Source: Consumer Price Index, All Urban Consumers (CPI-U), U.S. City Average, All Items, 1982–84 = 100, Bureau of Labor Statistics, U.S. Department of Labor, (ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt). 75 76 Chapter 6 4. Answer the following based on the following data: ____________________________________________________________________________________ Year Nominal GDP 1 $4,500 billion GDP Deflator 100 2 4,950 105 3 5,260 108 Real GDP _______ _______ _______ _______ 4 5,390 112 ____________________________________________________________________________________ a. What is the base year? __________________________________________________________________ b. Explain. _____________________________________________________________________________ c. Calculate real GDP for years one through four. d. In what year did real GDP decline?________________________________________________________ Every Macroeconomic Word You Have Ever Heard 77 SELF TEST --- MULTIPLE-CHOICE QUESTIONS 1. The cost of a market basket was $200 in the base year of 1990, and the cost of the same market basket was $350 in the year 2001. The price index for the year 2001 equals a. 350. b. 175. c. 57. d. 700. 2. As the post-war period following World War II began, the CPI rose from 18.2 at the end of 1945 to 21.5 at the end of 1946. (Base year: Average 1982–1984 = 100) Estimate the inflation rate in 1946. a. 1.53% b. 15.3% c. 1.81% d. 18.1% 3. In the midst of the Great Depression, the CPI fell from 14.6 at the end of 1931 to 13.1 at the end of 1932. (Base year: Average 1982–1984 = 100) Estimate the deflation rate in 1932. a. -1.15% b. -11.5% c. -10.3% d. -1.03% 4. The CPI is considered by many to overstate the cost of living and the inflation rate. Which of the following is not considered a reason for this problem? a. The CPI market basket changes frequently and immediately includes new products. b. Over time when products are cheaper elsewhere, people change where they buy them. c. Quality changes as older products disappear, and better quality goods replace them. d. Product substitutions take place following price changes. 5. Select the correct formula for estimating Real GDP. a. Real GDP = (GDP GDPDEF) 100 b. Real GDP = (GDP/ GDPDEF) 100 c. Real GDP = (GDP + GDPDEF) 100 d. Real GDP = (GDP GDPDEF) / 100 6. The Real GDP does not completely measure the value of all the goods and services which are produced and consumed in the United States. Which of the following is not considered a reason for this problem? a. Illegal work b. Government spending on education c. Unpaid work done at home d. Work that is “off the books,” for which the income goes unreported 78 Chapter 6 7. In the first quarter of 1982, the nominal GDP (at an annual level) was $3,193.8 billion and the GDP Implicit Price Deflator was 64.99 (1996 = 100). Estimate the Real GDP in 1996 constant dollars. a. $2075.7 billion b. $3258.8 billion c. $2034.9 billion d. $4,914.3 billion 8. In the first quarter of 1971, the nominal GDP (at an annual level) was $1,099.9 billion and the Real GDP in constant 1996 dollars was $3,666.1 billion. Use the relationship between the Real GDP, nominal GDP, and the GDP Deflator to estimate the GDP Implicit Price Deflator (1996 = 100). a. 70.00 b. 333.31 c. 30.00 d. 33.33 9. Assume that the price level increases at the same time that the economy goes into recession, and the actual level of output declines. Given this information, we know that a. the GDP Price Deflator will rise, the Real GDP will fall, and the nominal GDP may or may not increase. b. the GDP Price Deflator will rise, the Real GDP will fall, and the nominal GDP will definitely fall. c. the GDP Price Deflator will rise, the Real GDP will fall, and the nominal GDP will definitely increase. d. the GDP Price Deflator will rise, the Real GDP will rise, and the nominal GDP will definitely fall. 10. The Real GDP is not considered a perfect measure of social welfare in the United States. Which of the following is not considered a reason for this problem? a. The Real GDP ignores the composition of the output, and it gives equal weight to spending on military equipment and to spending on health and education. b. The Real GDP ignores the quality of the environment, which is often affected by production. c. The Real GDP ignores the value of leisure d. The Real GDP ignores production outside the geographic boundaries of the United States. 11. Which of the following is not a reason why depressions are less likely to occur in the modern economies of the twenty-first century? a. Governments have policies to alter interest rates. b. Governments have safety nets in the form of unemployment insurance. c. Governments can increase their regulation of industry. d. Governments have spending policies. 12. Carol is 15 years of age and works in her father’s firm 15 hours a week. Carol is considered to be a. underemployed. b. part of the workforce. c. subject to the encouraged worker effect. d. not part of the workforce. Every Macroeconomic Word You Have Ever Heard 79 13. All of the following are part of the workforce, except a. military workers. b. civilian workers who are 50 years of age and who are employed. c. civilian workers who are 25 years of age and who are unemployed. d. civilian workers who are over 16 years of age and who are actively seeking employment. 14. All of the following are reasons that the consumer price index can estimate inflation inaccurately, except a. the market basket changes frequently. b. quality improvements in electronics are not captured. c. people have significantly changed the places in which they buy goods. d. it assumes that people buy the same amount of everything, regardless of price and do not look for substitutes. 15. All of the following are flaws in measuring the unemployment rate, except that a. it counts as unemployed those people who are (correctly or incorrectly) encouraged by positive economic news to look for work before there really is any work. b. it fails to recognize the plight of workers who are working significantly below their skill level. c. it only counts people who are over 16 years of age. d. it does not count as unemployed any people who are so discouraged that they stop looking for work. 16. James lost his job at his plant when robots were engaged to do the manufacturing. He is currently unemployed and will have to learn a new trade. James can be considered a. seasonally unemployed. b. structurally unemployed. c. frictionally unemployed. d. cyclically unemployed. 17. People who are unemployed for a short time in the transition to an equal or better job are said to be a. seasonally unemployed. b. structurally unemployed. c. frictionally unemployed. d. cyclically unemployed. 18. Which of the following is not a phase in the business cycle? a. unemployment b. peak c. trough d. recession 19. All of the following are characteristics of a recession, except a. a moderation in the inflation rate. b. a strong increase in the employment level. c. a declining period of at least two consecutive quarters in the business cycle. d. a reduction in real gross domestic product in the range of 2% to 3 %. 80 Chapter 6 20. Which is not considered a characteristic of a depression? a. A severe recession usually characterized by financial panic and bank closures b. Unemployment rates exceeding 20% c. Prolonged retrenchment in real GDP of 10% or more d. Significant inflation 21. Which of the following is a chain-based price index that adjusts for the substitution problem? a. CPI b. Core CPI c. PCE deflator d. PPI 22. What does the traditional CPI include that the Core CPI excludes? a. substitution effects b. new goods c. tuition and textbooks d. food and energy Every Macroeconomic Word You Have Ever Heard 81 SELF TEST --- TRUE / FALSE QUESTIONS T F 1. Microeconomics is the part of the discipline of economics that deals with national issues and the economy as a whole. T F 2. The CPI is thought to be a very accurate measure of the cost of living and inflation. T F 3. The Real GDP has been adjusted for inflation. T F 4. If the price level increases, and the output level stays the same, the nominal GDP will increase, but the Real GDP will remain the same. T F 5. The expenditure approach to the GDP measures the GDP by tallying all the income earned from the production. T F 6. The discouraged worker effect, which induces people to stop looking for work because of bad economic news, can cause the unemployment rate to rise. T F 7. Tom has a degree in nursing and is employed as a nurse’s aid. Tom can be considered underemployed. T F 8. Chain-based versions of the CPI reestablish the market basket every year; so new goods enter the market basket much more quickly. T F 9. The unemployment rate is the percentage of the people in the total economy that do not have jobs and are actively seeking them. T F 10. Efforts to solve the inaccuracies of the CPI still leave large errors, so that over 30 years, tax brackets and CPI-adjusted benefits will be over adjusted by 27 percent. T F 11. The Core CPI is the CPI with the impact of food and energy costs removed. T F 12. The PPI is the PCE deflator minus the Core CPI. T F 13.The expenditure approach is the only approach to calculating GDP. 82 Chapter 6 ANSWERS TO STUDY QUESTIONS PROBLEMS 1 a. The workforce: those over 16 and working part time ……….…………………… 4.2 million those over 16 and working full time ……………………………. 14.3 million those without jobs and actively seeking jobs……………………. 1.5 million Total Workforce 20.0 million b. The unemployment rate is the percentage of people in the workforce that do not have jobs but are actively seeking employment. The unemployment rate = (1.5 million/ 20.0 million) 100 = 7.5 % 2. a. The data for the price index are listed on the table on the next page. b. The index of 252.02 for 2005–2006 indicates that between the 2005–2006 academic year and the base year of 1990–91, tuition costs have increased by 152.02%. c. Tuition costs in 2005–2006 are over 8.2 times the 1976–77 level, since $7601/ $924 = 8.23 and 252.02/ 30.64 = 8.23. During this time period, tuition costs increased by 722.52%, since the percentage change in tuition equals [(7601 - 924)/ 924] 100 = 722.52%. 3. The inflation rate data are reported in the table on page 81. Note the high “double-digit” rates of inflation in 1974, 1979, and 1980. _________________________________________________________________________________ 4. Year 1 2 3 4 Nominal GDP $4,500 bil. 4,950 5,260 5,390 GDP Deflator 100 105 108 112 Real GDP Calculation ($4,500/100) ∙ 100 (4,950/105) ∙ 100 (5,260/108) ∙ 100 (5,390/112) ∙ 100 Real GDP = = = = $ 4,500.00 bil. 4,714.29 4,870.37 4,812.50 _______________________________________________________________________________________________________________ a. Year 1 b. Year 1 is the base year, because the price index (the GDP Deflator) is equal to 100. c. See results listed in the table above. d. Real GDP in year 3 was $4,870.37 billion and in year 4, Real GDP declined to $4,812.5 billion. Every Macroeconomic Word You Have Ever Heard AVERAGE ANNUAL UNDERGRADUATE TUITION PAID BY FULL-TIME-EQUIVALENT STUDENTS IN U.S. DEGREE-GRANTING INSTITUTIONS Selected Years 1976-77 to 2005-06 Tuition and Required Fees (in-State) at All Institutions Tuition and Fee Price Index 1990–91 = 100 1976–77 1978–79 1980–81 1982–83 1984–85 1986–87 1988–89 1990–91 1992–93 1994–95 $924 1,073 1,289 1,626 1,985 2,312 2,658 3,016 3,517 4,044 30.64 35.58 42.74 53.91 65.82 76.66 88.13 100.00 116.61 134.08 1996–97 1997–98 1998–99 1999–00 2000–01 2001–02 2002–03 2003–04 2004-05 2005-06 4,564 4,755 5,013 5,238 5,377 5,646 6,002 6,608 7,122 7,601 151.33 157.66 166.21 173.67 178.28 187.20 199.01 218.07 234.58 252.02 Year The data have not been adjusted for changes in the purchasing power of the dollar over time. Source: Table 313, U.S. Department of Education, National Center for Education Statistics, http://nces.ed.gov/programs/digest/d06/tables/dt06_319.asp. 83 84 Chapter 6 CONSUMER PRICE INDEX All Urban Consumers Base Year: 1982–1984 = 100 CPI At End of Year Year 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 Inflation Rate 41.1 42.5 46.2 51.9 55.5 58.2 62.1 67.7 76.7 86.3 94.0 97.6 101.3 3.3% 3.4 8.7 12.3 6.9 4.9 6.7 9.0 13.3 12.5 8.9 3.8 3.8 Source: Consumer Price Index, All Urban Consumers (CPI-U), U.S. City Average, All Items, 1982-84 = 100, Bureau of Labor Statistics, U.S. Department of Labor, (ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt). MULTIPLE-CHOICE QUESTIONS 1. 2. 3. 4. 5. B D C A B 6. 7. 8. 9. 10. B D C A D 11. 12. 13. 14. 15. C D A A C TRUE / FALSE QUESTIONS 1. 2. 3. 4. 5. F F T T F 6. 7. 8. 9. 10. F T T F T 11. T 12. F 13. F 16. 17. 18. 19. 20. B C A B D 21. B 22. D